Early Returns From Seattle's Minimum-Wage Experiment

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”Read More.

The minimum wage arouses fierce passions among many people, and even fiercer confidence. Both sides in the minimum wage debate are completely sure that all the evidence is on their side and that the studies proffered by the other side have been “debunked.” If only one side or another had been debunked. But the quality of empirical evidence available is simply not that high.

Many fine economists have done a fine job investigating the question. But as I’ve written before, it is simply very hard to get the kind of data necessary to conclusively assess how raising the minimum wage affects an economy.

We can, however, pick up little bits of data here and there, which may, over time, amount to a reasonable approximation of its effects. And so it was with great interest that I approached a new study out of Seattle, which analyzed the effects of the city’s new $15-an-hour minimum wage.

This study is, like all the other studies that went before it, necessarily limited. The researchers cannot actually look at the counterfactual -- what would the labor market have looked like if Seattle had not enacted this minimum wage? -- and so instead they have to compare Seattle to other places they deem sufficiently similar. They’re also investigating the effects of the new law during its phase-in, meaning that the effects they found will probably (although not necessarily) be smaller than what we’ll see when the law is fully implemented. That said, it’s a useful snapshot, even if we haven’t yet seen the full movie.

So what did they find? People are getting paid a higher wage -- and yet, earnings didn’t rise much, because people are also working less. People who made less than $11 an hour before the law took effect saw, on average, a modest bump in their paycheck (about $72 every three months). The median number of hours worked fell by about four hours per quarter.

If you can make slightly more money by working slightly fewer hours, who wouldn’t take that deal? The trouble is that this is the average effect. If the cutbacks in hours worked are "lumpy" -- if some people saw big reductions, while others saw little or none -- then the people whose hours were reduced a lot could well be worse off, while the people who got the wage hikes and the same number of hours might be substantially better off. This is particularly true if one of those “lumps” consists of people who become unemployed entirely.

Which it seems to. According to the study, the share of those low-wage workers who were still employed after the law took effect fell by 1.2 percent. That’s not Great Depression-level unemployment by any means. And some of it could consist of people who would, say, rather be home with their kids, and who no longer need to work because their partner just got a substantial raise thanks to Seattle’s higher minimum wage. However: 1.2 percent is not nothing. And given that it’s not really all that easy to support a family on $11 an hour in Seattle, I’m pretty skeptical that this represents a lot of voluntary unemployment. There’s also evidence that about 3 percent of previous workers had to look for work outside the city of Seattle.

This matters because unemployment matters. Long-term unemployment tends to make people permanently unhappy even when their basic material needs are taken care of. So substantial and permanent declines in the share of workers who are employed is a huge cost, and I’d want to see some pretty big benefits to justify it.

Is the benefit big enough? The best guess is that workers who remained employed saw a quarterly increase in earnings of about $184. If you live in a low-income household, $736 a year is a substantial sum. On the other hand, if you live in a low-income household, “no wages at all” is catastrophic.

Of course, these effects are likely to increase as the higher wages phase in. The earnings increases will grow, but so will the number of people who see their hours reduced or who can’t find work at all, or who have to take on a new and less attractive commute because they can no longer find a job in Seattle. We will have to wait to see whether the costs and benefits rise together, or one eclipses the other.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”Read more